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The South Korean won is unlikely to respond positively even if the Bank of Korea (BoK) adopts a hawkish tone and hikes benchmark interest rate over the coming months, according to the latest report from ANZ Research.
The hawkish tone from the BoK has been reflected in the rates market, where one 25 basis points hike is almost fully priced over the next three months, which has also helped to strengthen the KRW. Currently, the central bank is expected to maintain its policy rate unchanged at 1.50 percent through the whole of this year.
However, even if the BoK shifts to hawkish stance, the domestic currency will not act firm. For one, it will unlikely be the start of an elongated tightening cycle like in 2010, given the headwinds to growth we noted earlier. Therefore, there should not be a material re-pricing in the rates market. Hence, the impact on the KRW will be muted.
"We recommend staying short KRW. We take profit on our long SGD/KRW trade, and switch into a long EUR/KRW position. We also close out of our short TWD/KRW tactical trade," the report commented.
